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Trading Trump Tail Risk

By November 10, 2016 No Comments

Trump stock marketOver the past few months, a consistent mantra in the markets has been “Trump Tail Risk”. Much like Brexit, these tail risk events can throw financial markets into disarray as traders and Economic models have to adjust.

One thing that financial markets do not like is uncertainty. Given that there has not been much clarity on policy during the campaign, investors only have a vague idea of how they should position their portfolios for a Trump presidency.

Therefore, extreme volatility seems to be the norm over the coming months. For a stock trader, however, this can be a blessing. Volatility is often considered a trader’s best friend as the opportunity exists to take advantage of it.

Before one can take advantage of this volatility, you have to find the best online broker. Once your broker has set you up with the system you could start out with a demo account and once comfortable with your trading, place funds in the account and trade for real.

Here are a few simple ideas for beginners on trading this “Trump Tail Risk”

Buy Defence Stocks

World conflict and uncertainty is indeed on the rise. You have ongoing war in the Middle East, concern over Russia and China in Eastern Europe and Asia. Given that Trump has been harsh of NATO during his presidential run, these concerns are amplified. Similarly, Trump has promised to increase millitary spending substantially when he takes power.

Therefore, it is more likely that countries all around the world will start building up their militaries. Defence stocks are ripe to benefit from new orders and contract renewals. As a trader, you could either place a long position on a defence ETF (Exchange Traded Fund) or Stock pick individual defence companies.

If you would like the diversification accross the sector then the iShares U.S. Aerospace & Defense ETF would be your best bet. If, however, you would prefer to take a view on an individual share, Raytheon (RTN) and Lockheed Martin (LMT) appear poised to cash in on a number of lucrative contracts. Both have reasonable P/E ratios and growth rates.

For the near term, a trader should watch any announcements from Trump’s defence advisors around military policies and procurement. You should also keep an eye on developments at the latest international air shows where large foreign contracts are often announced.

Sell Clean Energy, Buy Coal

If there was one theme that was consistent from the Trump camp, it was that he would place more focus on traditional sources of power such as coal. He was also clear that he would scrap the Paris Climate change accord and place way less attention on these other clean sources.

Hence, there exists the opportunity for a pair trade between two stocks (or Indexes) that have business on either side of the spectrum. One of the companies most exposed to a selloff in clean energy are Vestas (World’s biggest Wind turbine manufacturer) and First solar. Therefore, these would be interesting stocks to short. Both have invested a lot in the outcome of the Paris accord last year.

One the buy side, global coal miners appear poised to reap the rewards. These include companies such as BHP billiton, Glencore and Peabody energy (largest U.S. coal miner).

Buy Gold Miners

This trade is more about the uncertainty of the current climate than a fundamental policy position. Gold is often seen as a safe haven asset that holds it’s value. Moreover, the likelihood of a Fed rate hike in December has now fallen by half.

All of this has resulted in a spike in the Gold price to the benefit of gold mining stocks. Interesting stocks to buy could be Anglo Gold Ashanti or Barrick gold. Both have a wide range of diverse assets across the globe which can decrease their cost of production.


Global financial markets have now entered uncertain times. Much like back in 2008, traders and investors are looking to policy from both the government and the Fed in order to inform their decisions and place their positions.

A skilled trader, on the other hand, can use this as an opportunity to profits from wild swings in global markets.

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